Protecting the Primary Residence

Protecting the Primary Residence in Rhode Island

Beginning July 1, 2014, Rhode Island Medicaid planning became a little bit more difficult as one common option to protect the primary residence was “taken off the table”. As part of Rhode Island’s 2014-2015 budget bill, so-called “Ladybird Deeds” were rendered ineffective as Medicaid planning tools if signed after July 1. While Ladybird Deeds are still available as a simple way to transfer title in one’s home to children or other family members, they no longer have any effectiveness for long term care purposes.

So what options remain as planning tools for the primary residence?

Doing Nothing. From Medicaid’s standpoint, if you are the sole owner of your home and need nursing home care, the primary residence will be an exempt asset while you are living (and thus, will not be “taken” by Medicaid during your lifetime), but will be subject to a lien by the state when you pass away if it is part of your probate estate. If you own the home as a joint tenant or as tenants by the entirety with a spouse, it will be an exempt asset while you are living (should you apply for Medicaid) but will not be recoverable by the state when you pass away, since it will automatically go to your spouse or to the other joint-owner outside of probate. Of course, these scenarios assume that one in need of nursing home care is otherwise financially eligible for Medicaid.

Giving the Property to Children. As has been discussed in previous editions of this newsletter, outright gifts to children come with many risks. First, a gift of one’s primary residence to one’s children is subject to a 5-year Medicaid “lookback” period. That is, it will be considered by Medicaid to be a disqualifying transfer if made during the five years prior to the Medicaid application. Furthermore, giving the primary residence to one’s children means that they own it, and so it becomes an asset subject to events like the childrens’ divorce and other legal liability. Last, a lifetime gift of property to children means that for tax purposes, your children will receive the property at your tax basis. If there has been significant appreciation in the property’s value over your lifetime, your children will owe capital gains taxes should they sell the property down the road. If after considering all of these potential pitfalls, one still wishes to transfer the property outright to his or her children during lifetime, the home would be “protected” if the transfer makes it past the lookback period.

Creating a Life Estate Deed. A traditional life estate deed whereby parent retains the lifetime right of occupancy and possession of the home, subject to a child’s right to receive the property only upon parent’s death, is a good way to protect the property from a Medicaid lien. First, by doing a life estate deed, parent still retains virtually all control over the property. Should parent wish to sell the property in the future, however, the remainderpersons (presumably, one’s children) would have to “sign off” on the sale, since they own a future interest in the home. However, a life estate deed removes the property from one’s probate estate, meaning that it is no longer subject to estate recovery when parent dies. It passes automatically to whomever else’s name appears on the deed as a remainderperson. A life estate deed conveyed for less than fair market value, though, is considered a transfer of an asset and is subject to the same 5-year lookback rule mentioned above. Furthermore, complications could result if one of the remainderpersons passes away before the life estate holder does.

Revocable Trust. Transferring property to a revocable trust removes the property from one’s probate estate while still allowing the person full use, occupancy and control during life. Upon death, the trust dictates who the property will pass to under its beneficiary provisions. Again, this post-death transfer happens outside of probate. Because the person transferring property to a revocable trust retains full control over the property, however, the home is not protected for Medicaid purposes. If a person applies for Medicaid with their primary residence in a revocable trust, the property will have lost its “exempt status”, and thus, will become a countable asset unless transferred back into the person’s name. If transferred back out of the trust and back to the person, the home would again receive exempt status, but would then be subject to the state’s lien upon the person’s death since it would be part of the person’s probate estate.

Irrevocable Trust. Transferring property to an irrevocable trust also removes the property from one’s probate estate and provides for beneficiaries upon the person’s death. If the transfer of one’s primary residence to an irrevocable trust makes it past the five-year lookback period, the house will be protected from Medicaid’s reach, provided the trust sufficiently limits the person’s control over the property. Again, because the property is deemed to no longer be owned by the person applying for Medicaid, it will not be a countable asset, and will also avoid having a lien upon the person’s death, since trust assets are not part of one’s probate estate. The irrevocable trust, though, must be drafted in a way that satisfies the state and shows that the person’s control over the property has been given over to the trust, and subject to its terms.